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Nearly half of Americans will pay no federal income tax – here’s why

Posted at 11:50 AM, Apr 13, 2016

As you’re struggling to fill out your tax return, and wondering where the money will come from to send to the Internal Revenue Service, ever wonder how many of your neighbors aren’t paying taxes?

Would you believe nearly half? That’s right: nearly half of American households won’t pay any federal income tax for 2015 legally. And some of them will get a refund anyway!

As remarkable as it may sound, the Tax Policy Center concluded that an estimated 45.3% of Americans do not have any 2015 federal individual income taxes to pay at all — and some of them actually have a negative income tax rate, meaning they will receive benefits that are beyond their zero tax liability.

This is not an unusual situation, either. Information from the Tax Policy Center shows that the number of households that pay no federal income taxes has been rising steadily. In 2011, there were 74.8 million households that did not owe federal taxes, compared to 77.5 million in 2015. At least percentage-wise, the amount of non-federal-taxpaying households is decreasing, from 45.8% in 2011 to 45.3% today.

Out of 171.3 million households (or “tax units” in the dry phrasing of the Tax Policy Center), 143.4 million households filed taxes. Within that group, 93.8 million households owed taxes of at least $5 (taxes of $5 or less were considered the same as no taxes at all for analytical purposes).

The table projects results to 2025 assuming current tax law (an assumption that is almost guaranteed not to happen) and while both the number and percentage of non-taxpaying households is predicted to fall, it never goes below 74.1 million households and 40% respectively. Estimations for the 2015 tax year and beyond are provided by a Tax Policy Center simulation model.

This statistic may bring to mind rich people avoiding taxes through loopholes and other tax shenanigans, but it shouldn’t. Of that 77.5 million, approximately half do not pay taxes because they have no taxable income at all, and the other half get enough tax breaks to compensate for their tax liability. Thanks to refundable credits like the Earned Income Tax Credit and components of the Child Tax Credit, it is possible to end up with a negative tax rate.

In reality, the average income tax bill per person is negative for the lower 40% of incomes, as it almost has to be for the above statistics to be possible. According to data from the Tax Policy Center, the average income tax bill per person is a negative $643 for the lower 20% of incomes and a negative $621 for the second lowest 20%. Combined, that means that the remaining 60% must pony up an extra 4% of the collective tax bill — in other words, 60% of America pays the entirety of the country’s federal income taxes plus another 4% of that bill that is redistributed to the lower 40% of taxpayers.

Meanwhile, the richest 20% of American households pay an average of $50,176 in taxes and account for 86.8% of the total federal tax bill. Households with the top 1% of income pay 43.6% of America’s tax bill, and the 115,000 households that comprise the top 0.1% pay over 20% of the tax bill.

One can argue whether this is the right distribution of taxes from either an economic or a social justice standpoint — and in an election year that is going to happen ad nauseum — but there is no argument that the amount of households paying no federal taxes is fairly close to half. Given that many of those households are on the lower end of the economic spectrum, it is entirely possible that the number could increase under either Republican or Democratic administrations.

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